The "Austerity" Wars, Continued

Sometimes it's like the field of public debate is a house of mirrors at the amusement park, where everything is so distorted that it becomes impossible to make any sense at all out of it.  In current public debate, nothing is so distorted as the debate over the form of government fiscal policy called "austerity." 

I start from a simple proposition that is obvious to anyone who follows basic economic statistics:  Among countries that more or less respect property rights, the smaller the government sector as a percent of GDP the more successful the economy, and the larger the government sector as a percent of GDP the less successful the economy.  Thus the very most successful economies are those with government sector less than 35% of GDP (Switzerland, Hong Kong, Singapore).  Countries with bloated government sectors that are able to shrink them noticeably see dramatic improvement in economic performance (Sweden, Latvia, the UK under Thatcher).  Countries that allow government spending to get above 50% of GDP see stagnation and shrinkage if not crisis (Greece, Italy, France).  Within the U.S., low tax low spend states (Texas, Florida) consistently outperform high tax high spend states (New York, Illinois, California).  There is nothing really complicated about this.   

But now we have legions of government dependents and sycophants in academia and the media who are literally desperate to stop the idea that any penny of government spending anywhere may ever be cut. And thus we have the "austerity" scam, where modest (if any) spending cuts are mixed with big tax increases, economic performance worsens, and the result is shrilly claimed to be evidence against spending cuts.    

The Austerity Wars have reached a new level of hysteria over the last month.  I last visited this subject on June 4, where I quoted from a June 2 article in the Financial Times by Larry Summers where he claimed that "rapid deficit reduction" would lead to decline in "output and jobs," and a "weaker economy," that would cause "our children" to end up with "more debt and less capacity to bear the burden it imposes."  To Larry, it's just obvious that less government spending causes more debt.   Is there anyone in the world with more credentials and less actual competence? 

On the same June 4 the Senate Budget Committee held a hearing on "The Fiscal and Economic Effects of Austerity," and called Summers to testify.  (Presumably his Financial Times article was the precursor to that testimony.)  The Republicans called Salim Furth of the Heritage Foundation.  Furth made the obvious argument that the countries that had implemented "austerity" had actually raised taxes more than they had cut spending, and that the tax increases are what had hurt their economies.  Here is a link to the Senate hearing.

Furth's testimony seems to have set off a firestorm.  Committee member Sheldon Whitehouse of Rhode Island (one of the Senate's truly dim bulbs) promptly read a statement from an aide that "I am concerned your testimony to the committee has been meretricious."  There was an immediate ad hominem piling on from the usual left-wing pundits.  For example, there was Krugman of the New York Times  ("One does wonder . . . whether Heritage may at this point be destroying its own usefulness."), and Steve Benen of the Maddow Blog  ("[A]s Heritage transitions from its traditional role as think tank to its new role as an activist group, and the intellectual infrastructure on the right deteriorates, GOP lawmakers no long [sic] have such a resource.").   Their main complaint?  Alleged discrepancies between Furth's numbers and OECD numbers that he had used as a starting point.  The difference is technical and not worth getting into.

The big point here is that all government-produced numbers are cooked to make cuts in government spending look like dollar-for-dollar decline in GDP.  That accounting is universal, fake and fraudulent.  I have previously discussed it, for example, here .  The government numbers need huge corrections for the fact that government spending is inefficient and wasteful and does not add nearly dollar-for-dollar to GDP.   Similarly a dollar of government spending cut does not cut GDP by anything close to a dollar.

Furth has gamely responded to his many critics, for example here.   Rea Hederman of Heritage weighed in on June 13 to support him, in a post that included this line:

There is a long record of empirical research showing that spending cuts are less damaging to the economy than tax increases and that the benefits of spending cuts often exceed the costs.

Spending cuts are "less damaging"??????  "The benefits of spending cuts often exceed the costs"??????  These statements can only be made in a world where everyone buys into the fraudulent idea that government spending counts at the same value as private spending in GDP.  The fact is that inefficient government spending is hugely damaging to an economy, and cutting it is hugely beneficial, and the governments are cooking the numbers to hide that fact and to prevent any cuts.  Really, the conservative think tanks need to wake up to this one.  Is everyone in the world but me getting taken in?

Here is an even more recent study from Matthew Melchiorre of CEI on June 26.  It has detailed numbers based on data from Eurostat on economic performance of the 26 EU countries starting from the date that each country announced that it was instituting some form of "austerity."  He puts the countries in nine categories based on whether government spending increased, decreased or stayed the same, and whether taxation increased, decreased or stayed the same.  Result:  the countries did best where both government spending and taxation decreased (Bulgaria, Ireland, Latvia, Lithuania).  Surprise!!!!!  

And yet in the Melchiorre study, the gap in average 6 year GDP growth rate between the best performing category (spending decreased, taxes decreased) and the category of spending increased and taxes increased, is only 1.19% growth per year (2.65% for decreased/decreased and 1.46% for increased/increased).  Why so little?  Yes, Melchiorre is also using the fake government GDP numbers where even government spending that forces doubling energy prices by subsidizing inefficient energy is counted as dollar-for-dollar increase in GDP.   In any real accounting the difference between good policy (cutting government spending) and bad (increasing government spending) would be easily triple as much.  Come on guys!